With interest rates still near their historic lows, dividend investing has been in vogue in recent years.
Historically, the tech industry hasn't been the most fertile ground for dividend investors; companies in the sector tend to skew toward non-dividend growth stocks. Until recently, only longtime dividend payers such as the century-old International Business Machines (NYSE: IBM) had anything resembling a decent capital-return program.
But things have changed in recent years, as an increasing number of highly profitable tech companies have matured and their cash balances have ballooned . Given the tech sector's growing number of viable dividend stocks , then, income investors would do well to consider Intel (NASDAQ: INTC) , Apple (NASDAQ: AAPL) , and Cisco Systems (NASDAQ: CSCO) in lieu of IBM.
The world's largest chipmaker might seem like an odd entry. In fact, IBM beats Intel in a number of important dividend categories, including current yield and consecutive annual dividend increases. However, Intel may have much more room to increase its per-share payouts in the years to come than Big Blue does.
IBM has leaned on financial engineering to drive its earnings-per-share gains in recent decades. From 2006 to today, IBM's debt-to-equity ratio has risen from 0.75 to 2.3, while its shares outstanding have fallen from roughly 1.5 billion to 939 million over the same period. There's not a near-term risk from this practice, but it isn't sustainable. Eventually, IBM's growth, or lack thereof, will adversely affect its dividend.
Meanwhile, Intel's balance-sheet strength, more profitable margin structure, and greater cash flow-generation capabilities make it a strong contender to outpace IBM's dividend increases in the years to come. Moreover, Intel is moving into emerging growth markets such as self-driving cars , whereas IBM's top-line issues have been well documented at this point.
Image source: Getty Images.
As with Intel, considering Apple from an income-investing standpoint is based mostly on the potential for dividend growth. Here, the focal points are Apple's massive current cash hoard and its relatively low payouts.
The Mac maker carried a net cash balance of $158 billion as of its fiscal Q2 earnings report, a number that seems likely to increase with the anticipated success of the 10th-anniversary iPhone later this year.
If there's one criticism of Apple's dividend policy, it's that the company hasn't grown its dividends per share as aggressively as some might like. Apple pays out only 26.5% of profits as dividends, while IBM and Intel hand over 46.1% and 45%, respectively. On the other hand, although Apple's dividend yield is just 1.5% today, below that of IBM and the S&P 500 , the company seems like a safe bet for sustained above-average dividend growth over the long term.
Of the three companies here, router kingpin Cisco Systems is the only one that can match IBM in terms of its current yield. Cisco's dividend yields 3.4% over its past four quarters and 3.7% for the year; it's already increased its dividend for 2017. However, where Cisco differentiates itself is in its recent track record of dividend growth.
The company only began paying its dividend in 2011, but in that time its annual dividends per share have risen from $0.24 in 2011 to $1.04 in 2016, for an impressive average annual growth rate of 27%.
Whether Cisco can maintain such a torrential pace, however, isn't clear, as the company already pays out 54.3% of its net earnings to shareholders. However, the balance sheet is pristine shape -- it carries $35 billion in net cash today -- and the company enjoys a compelling long-term growth tailwind in the Internet of Things. For those reasons, Cisco's dividend growth prospects appear much better than IBM's and place it among the most compelling dividend stocks in all of tech.
10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 5, 2017
Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool has a disclosure policy .